Chapter 13 - Dividends

1
Chapter 13 - Dividends

• Returns from price change and dividends
• Issues payout ratio, dividend stability
  considering reinvestment opportunities and
  shareholder preferences
• Payout ratio Dividends per Share
• Earnings per Share
• Currently 35 historically about 50

2
What to Do With The Money?

• Corporate cash holdings growing rapidly
• Choices Reinvest in new products?
• Pay dividends?
• Make acquisitions?
• Do stock buybacks?

3
Dividend/Retention Trade-off
4
Dividends Stock Price

• Major change in tax law both dividends and
  long-term capital gains taxed _at_ 15
• Makes part of chapter irrelevant
• Still an issue should company reinvest profits
  in itself to take on new projects providing high
  returns and growing stock price or pay earnings
  to shareholders?
• Reinvestment opportunity residual theory

5
Other Approaches

• Residual dividend theory leftovers
• Clientele effect
• Information effect communications tool
• Expectations effect revise perceptions?
• Empirical evidence very mixed but may slightly
  favor nonpayers but recently challenged

6
Dividends in Practice

• Usually quarterly as approved by Board of
  Directors
• Legal restrictions
• Liquidity position
• Other sources of financing
• Earnings predictability

7
Other Dividend Matters

• About 75 of SP 500 pay dividends
• Dividend Yield currently 1.95
• Dividend Reinvestment Programs Reinvest
  dividends by buying same stock
• Dividends have been increasing but not as fast as
  profits and stock prices

8
Alternative Policies

• Constant payout ratio
• Small regular plus year-end extra
• Stable amount per share most common
• Usually profits grow faster than dividends
• Wait until were certain attitude
• Yearly dividends since 1885 Eli Lily
• GE (1894), PPG (1899), Pfizer (1901)

9
Stock Dividends and Splits

• New shares issued on pro rata basis to current
  shareholders
• No economic consequences
• Accounting differences only
• Split new shares 25 over existing
• Stock dividends increase under 25
• Reverse splits reduce number of shares
• Should increase price and avoid delisting

10
Stock Repurchases

• Boosts EPS (price?) uses excess cash
• Buy as an undervalued investment
• Dont have to complete effect on price?
• Cant go on forever
• Buybacks must be publicly announced
• Analogy buybacks dating div marriage
• Bottom line its capital restructuring

11
Microsofts Biggie

• First annual dividend in 2003 (8/share)
• Double to 16 early 2004
• July 2004 announced
• Regular dividend doubled to 32 (3.5 bil)
• 3/share one-time special dividend (32 bil)
• 30 billion share buybacks over four years
• Driven by 56 bil cash, high profits, new tax law.